The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

by Scott Patterson

Griffin specialized in finding cheap bonds through mathematical formulas, or, via the same logic, cheap, down-on-their-luck companies ripe for the picking. Muller liked to buy and sell stocks at a superfast pace using Morgan Stanley’s high-powered computers. Asness used historical tests of market trends going back decades to detect hidden patterns no one else knew about. Weinstein was a wizard with credit derivatives—securities whose value derives from some underlying asset, such as a stock or a bond. Weinstein was especially adept with a newfangled derivative known as a credit default swap, which is essentially an insurance policy on a bond.

The Truth was a universal secret about the way the market worked that could only be discovered through mathematics. Revealed through the study of obscure patterns in the market, the Truth was the key to unlocking billions in profits. The quants built giant machines—turbocharged computers linked to financial markets around the globe—to search for the Truth, and to deploy it in their quest to make untold fortunes. The bigger the machine, the more Truth they knew, and the more Truth they knew, the more they could bet.

To the quants, beta is bad, alpha is good. Alpha is the Truth. If you have it, you can be rich beyond your wildest dreams.

One of the primary forces behind this economic Shangri-la, he said, was an “increased depth and sophistication of financial markets.”

In 1990, hedge funds held $39 billion in assets. By 2000, the amount had leapt to $490 billion, and by 2007 it had exploded to $2 trillion.